Chapters 13 - Fiscal Policy, Deficits, and DebtBrief Outline
Fiscal Policy and the Multiplier Effect Show
FISCAL POLICY WE ALREADY KNOW: If there is UE? In this chapter we will look at how effective various fiscal policy tools are - or , put another way, we will the multiplier effect of various fiscal policy options. If a fiscal policy tool that has a larger multiplier effect is more effective at reducing unemployment or inflation. A tool that has a smaller multiplier effect is less effective. The table below outlines the various fiscal policy tools / multipliers.
The Government Spending Multiplier In Chapter 10 we used a model with just consumers (C) and businesses (I). Now let's add government to our model. The Lump-Sum Tax Multiplier There are three fiscal policy tools: The Balanced Budget Multiplier There are three fiscal policy tools: Multiplier with Crowding Out The crowding-out effect may be caused by fiscal policy.a. REVIEW MULTIPLIERS Multiplier with Supply-Side Effects A. What is "Supply-Side FP" ?1. The contention that tax reductions will also shift the aggregate supply curve to the right. The Multiplier with Changes in the Price Level We have been assuming that the price level does not change as AD increases (see graph, notice how AS is horizontal). Built-in Stabilizers: Non-discretionary Fiscal Policy
The Standardized BudgetWhat happens to the government budget deficit if it uses expansionary FP? Problems, Criticisms, and Complications
The Public DebtThe national or public debt is the total accumulation of the Federal government's total deficits and surpluses that have occurred through time.The federal government's budget DEFICITS and SURPLUSES are ANNUAL differences between the revenue collected and government spending. What happens if government spending and taxes increase by the same amount?The balanced-budget multiplier is equal to 1 and can be summarized as follows: when the government increases spending and taxes by the same amount, output will go up by that same amount.
How does government spending affect equilibrium income?There will be an overall increase in national income and the equilibrium level of national income will be higher than before. Using the Keynesian Cross, an increase in government expenditure will result to an increase in national income through increases in wages, consumption, savings, investment, imports and exports.
What is the effect of a decrease in both government spending and taxes by the same amount?When the government spending and taxes decrease by the same amount then the output will decrease by the multiple of government spending multiplier and will increase by the multiple of tax multiplier. The result is a fall in output by the amount of fall in spending and taxes.
What happens when government spending increases and taxes decrease?If the government uses expansionary policy and reduces tax rates and increases its spending on goods and services, it will likely result in extra income and spending in the economy. Expansionary fiscal policy is controversial, however, because it is likely to increase the level of government debt.
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